The Fitbit IPO: Winner or Washout?

Posted by admin on August 27th, 2015 10:02 AM

The market is humming today regarding the next huge technology IPO– Fitbit (FIT).

For the record, I completely expect shares of the fitness-tracking law firm to rally well over the deal cost … which will whip the mainstream media right into a frenzy and bombard us with the company’s “extremely effective debut.”

Don’t fall for the hype.

And, more importantly, don’t rush out to get shares for worry of missing out.

The IPO market isn’t really established to award day-to-day capitalists like us. It’s established to make us the bag owners, not the profiteers.

This might be specifically real when it comes to Fitbit’s IPO. Below’s why …

Fitbit in Perfect IPO Shape … However Financiers Beware

IPOs are everything about optimizing value for alreadying existing lovers and also personal investors.

That line births rereading, considering that you as well as I (i.e., daily investors) are nowhere to be found in the equation.

Instead, IPOs are about endeavor capitalists, effort lenders, and well-off insiders bring in the revenues. As well as in this case, we’re managing the savviest among them.

On the banking side, we’re dealing with the likes of Morgan Stanley (MS), Deutsche Bank (DB), and Bank of America Merrill Lynch (BAC).

With a lot of heavyweights involved– as well as salivating at the customers of lining their pockets– it’s not a surprise that Fitbit is going public at exactly this time.

The firm’s heading financials are off-the-charts outstanding. Take into consideration:

Sales have leapt virtually 10-fold in the last 2 years– from a simple $76 million in 2012 to $745 million in 2014.

In the most recent quarter, year-over-year sales tripled to $336 million.

Gross margins have actually swelled from 41 % to 50 %.

Fitbit is profitable– a rarity for IPOs.

And Fitbit’s global market share sign in at a chart-topping 34 %.

As Jan Dawson, analyst at Jackdaw Study, stated, “These income growth and also margin metrics assist to describe why the business is going with an IPO now– the numbers are very, great.”

Indeed! As well as there’s no far better time to ask for leading buck compared to when a company is firing on all cylinders.

The Wearable Rampage

What makes the timing a lot more engaging– and enhancing the “it’s getting even far better” story for Fitbit– is the reality that the wearable technology market appears positioned to introduce right into the stratosphere.

Tech research study company IDC expects wearable tool shipments to triple from 21 million in 2014 to 144 million in 2017.

Simply placed, the marketplace is as ripe as it potentially can be for very early investors to monetize their investment in Fitbit.

So a lot so, actually, that the firm had the ability to boost the dimension as well as rate of its IPO.

Fitbit now expects to provide 34.5 million shares between $17 and $19, as compared to earlier plans to supply 29.85 million shares between $14 and $16.

So what’s the problem?

A little thing called “history …”

History Repeating?

The Fitbit IPO is strangely comparable to the environment that came before the IPOs for Groupon (GRPN) and Zynga (ZNGA).

Each went public at the peak of their particular markets. As well as while very early investors as well as lovers made a lot of money, both stocks proved to be dreadful investments for day-to-day investors.

(And also yes, I alerted about both Groupon as well as Zynga beforehand.)

And there excels reason to think the exact same fate waits for Fitbit …

Peak Problems

To its credit history, Fitbit spearheaded the linked health and wellness market back in 2007. Considerably like Groupon pioneered the everyday deals market.

That’s vital, due to the fact that as a first-mover in the sector, Fitbit has actually delighted in unrivaled success, offering over 20 million gadgets to date.

But as markets mature and also time passes, competition always heats up.

And increased competitors is exactly what vows to threaten an effort in Fitbit.

Especially given that Fitbit offers a commodity item. I mean, its gadgets are absolutely nothing more than sensing units as well as software.

China’s Xiaomi recognized this, and also instantly pounced on the possibility. Over the in 2013, it’s flooded the market with its $15 Mi Band. (By comparison, Fitbit’s physical fitness trackers are valued in between $59 and also $249.)

Sure enough, Xiaomi snagged a shocking 25 % of the wearables market in the first quarter of 2015.

As a result, Fitbit’s market share has currently fallen from 44.7 % at the end of 2014 to 34 % today. As well as more decreases are just about assured, as brand-new entrants get more market traction.

It’s not just concerning competition from lower-cost tools, either …

Breaking up the Band

The danger of more market share disintegration is much higher, since Fitbit’s entire product line could possibly be settled as an attribute in another product. Similar to Garmin’s (GRMN) standalone GPS systems were essentially consolidated right into smartphones.

As Forrester Research study technology analyst Julie Ask explains, “Nobody knows yet if these health and fitness wearables are lasting or go the method of low-end digital cams.”

But the information doesn’t bode well for Fitbit.

Very few folks end up buying a 2nd tool. Just what’s more, nearly 50 % of readers wind up deserting their device in the initial year.

If past history is any type of quick guide, there’s a greater possibility of physical fitness monitoring ending up being a function within a bigger product compared to remaining a standalone one. In that regard, the Apple Watch looms as the greatest hazard to Fitbit.

Bottom line: Don’t think the buzz. Fitbit is involving market at the very best possible time for its already existing investors, not future ones.

The fact that insiders unexpectedly decided to sell more shares– 35 % of the offering, as compared to 25 % previously– just strengthens my conviction. They’re squandering while they can. Don’t be their bag holder.